Apple's Alleged E-book Price Fixing: What You Need To Know

The Justice Department has thrown a wet blanket on Apple’s iPad announcement week, warning Apple and the five biggest publishers that it will sue them for e-book pricing collusion. The threat has been on the horizon for months, but today’s news was the first formal statement from the government.

What Apple Did

Apple’s e-book controversy began in late 2009, when it finalized plans for the upcoming iBookstore. Here's how it unfolded:

Apple made a deal with Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan, and HarperCollins to use the “agency model." This means that publishers set the price at which retailers must sell the book.

Amazon and other bookstores traditionally use the “wholesale model.” This means the retailer sets the final price, giving it flexibility to offer sales and provide deep discounts. It also means publishers’ profits are ultimately affected by retailer decisions. Amazon famously kept its e-books priced at $9.99 for years.

As a dominant platform, Apple has enough influence to drive up book prices across the board.

Having established the agency model through Apple, publishers could (and did) force Amazon to change its pricing method

The result is that consumers lose, since they're left with higher prices and lukewarm competition. A parallel class action lawsuit is also occurring through the Seattle law firm Hagens, Berman, Sobol, Shapiro. Announced in late 2011, the lawsuit argued the same points and may have put the issue on the Justice Department’s radar.